Inflation drops to 2% target level in May

The headline rate of inflation slowed to 2% in May, according to latest Consumer Price Index data (CPI) from the Office of National Statistics (ONS).

Inflation fell 0.3 percentage points from April’s figure of 2.3%, bringing the rate of inflation back down to the Bank of England’s target rate and its lowest level since July 2021. Year-on-year, the CPI is down by 6.7 percentage points compared with May 2023.

The ONS’ CPIH rate of inflation, however, which includes owner occupiers’ housing costs, remains at 2.8%, falling just 0.2 percentage points with the housing costs component seeing 6.7% inflation, its highest annual rate since July 1992 (based on estimated historical data).

Conversely to the picture last year, the main downward pressure on inflation came from an overall 0.3% drop in food prices month-on-month, with prices rising only for oils and fats, dairy and eggs. Applying upward pressure was rises in petrol and diesel prices at the pump, which have risen 4p per litre for petrol, and just under 2p per litre for diesel compared with May 2023, when fuel prices were falling.

Despite the further fall in inflation bringing the CPI back to its 2% target level, the Bank of England looks unlikely to make any change to its base interest rate yet when its Monetary Policy Committee meets tomorrow (20th June). The bank’s economists are likely to remain cautious over lowering rates too soon, which could cause inflation to rise once more. High wage growth is continuing to add to cost pressures on businesses in the UK, even while more global inflationary pressures, such as those stemming from conflict in Ukraine, have eased. Furthermore, the bank will be wary of the slow GDP growth reported in recent economic data.

Elsewhere in the world, the European Central Bank cut its interest rates this month in spite of larger eurozone economies recording higher rates of inflation than the UK. The Federal Reserve in the United States looks unlikely to lower rates again before September, although it also reported 2% inflation in May 2024.